It’s tough being the U.S. dollar.
You may be the world’s only remaining reserve currency, but everybody still seems to loathe you. Americans seem to be the worst offenders.
The dollar’s every move is tracked tighter than titillating tabloid coverage of Oprah’s epic struggle with cheeseburgers or Tiger’s precipitous fall from grace.
For the U.S. dollar, it’s like being trapped in a Zen nightmare. No matter where you go, there you are.
In recent days, however, investors have grown more bullish on the dollar since the collapse of Lehman Brothers Holdings Inc. in 2008. This new optimism towards the dollar is being driven by growing speculation that the U.S. economy will expand at a faster post-recession pace than either Europe or Japan.
Since mid-January, the Euro has been hammered by fiscal concerns facing several European Union member states, Greece being the most prominent. Athens is struggling to close the biggest deficit in the region. Analysts put the Greek debt at an alarming 120 percent of its gross domestic product.
Although the EU, and specifically Germany and France pitched in to pull the Greeks back from the abyss, there is lingering apprehension among currency traders that Spain, Portugal, Ireland and even Italy may be drifting dangerously close to a similar state of insolvency.
A Boost for the Dollar
Yesterday, at a press conference in London, Fitch Ratings hinted that looming debt problems may lead to a downgrading of Portugal’s credit rating. Such a move would make it harder and more expensive for Lisbon to borrow its way out of its fiscal predicament. Officials at the international credit rating company also expressed trepidation about Spain’s efforts to consolidate its debt.
During the past month, the Euro-zone’s mounting misery has given a huge boost to the dollar’s prospects. Now a growing number of economists believe the U.S. Federal Reserve will raise interest rates long before either the central banks in Europe or Japan.
Despite recent gains from the end of fiscal year repatriation flows – each year Japanese repurchase their currency to book overseas profits in yen – the Japanese currency also has started to slip against the dollar. Toyota’s tribulations combined with reports that the Bank of Japan may be leaning towards further easing of credit to stimulate its still flagging economy, has lifted the dollar against the yen.
While the widely held public perception of our prospects from within our borders is still uncertain, the view from the outside looking in is remarkably upbeat. It hasn’t seemed to matter that the unemployment numbers in the U.S. remain close to historic highs or that emerging economies like China and India appear to have regained their growth trajectories.
According to a survey of leading economists just completed by Bloomberg, sentiment toward the dollar climbed to 66.39 this month from 55.72 in February. Any reading above 50 reflects a positive outlook towards the dollar.
Fed Will Make the First Move?
The dollar bulls also have focused their attention on the projected growth differentials between the EU, Japan and the U.S. Japan still hasn’t fully mended its economy after a nearly 15-year slump, and aggregate growth among the EU member states is likely to remain choppy.
International currency traders seemed to have reached the conclusion that the U.S. Fed will be the first central bank to cinch in the money supply by pushing up interest rates. Even though any interest rate bump by the Fed may be months away, most traders surveyed think that central bankers in Japan and Europe will remain hamstrung for the foreseeable future.
The greenback likewise has benefited from a weakening British pound. During the first two months of 2010, the British economy has gotten off to a rocky start. U.K. manufacturing output unexpectedly fell 0.9 percent in the first month of the year. The initial readings for February look as if they will mirror January. With Prime Minister Gordon Brown under fire, the uncertainty of the political climate in the Britain also has added to the woes for the pound sterling.
Burgeoning strength of the U.S. currency has weighed on dollar-denominated commodities like oil and precious metals. Up through today’s opening, crude oil had been trading well off its recent highs, near $85 per barrel. A report this morning showing that U.S. fuel supplies had declined, along with an OPEC statement that it will need to produce more than previously forecast to meet global demands, pushed oil futures for April above $83.
Gold and silver prices have moved lower as the dollar has gained momentum. Gold has fallen back to a low of $1,103 from its January highs near $1,160 an ounce. Silver has pulled back 60 cents, below $16 per ounce.
For the first time in several months, the grass actually may be greener in our own backyard.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
